HHS Can Target Obamacare's Medical Loss Ratio Rule Right Away

Sally Pipes
, ContributorI cover health policy as President of the Pacific Research InstituteOpinions expressed by Forbes Contributors are their own.

WASHINGTON, DC - APRIL 4: Secretary of Health and Human Services Tom Price arrives at a meeting of House Republicans on Capitol Hill April 4, 2017 in Washington, DC. (Photo by Aaron P. Bernstein/Getty Images)

The legislative effort to repeal and replace Obamacare is on hold until Congress returns from recess. In the meantime, the executive branch can do its part to dismantle the health law's most destructive components.

The Trump administration can start by modifying Obamacare's "medical loss ratio" rules, which dictate how insurers must spend the money they collect in premiums. Like many of the law's diktats, these rules have driven premiums higher and eroded competition and choice in the insurance market.

It's well within Secretary of Health and Human Services Dr. Tom Price's authority to loosen the MLRs. He should waste little time doing so.

The medical loss ratio rules require insurers in the individual and small-group markets to spend at least 80% of premiums on "activities that improve health care quality." Large-group plans have to spend 85% of premium dollars on these "activities."

The idea is to limit supposedly wasteful and self-serving spending by insurers. As the Obama administration put it, a "smaller portion of premium dollars directed to administrative costs and profit means that consumers are receiving a higher return on their premium dollars."

That was the promise. But the rule was based on a number of faulty assumptions. First, it assumes that all administrative costs are wasteful -- even those associated with fraud prevention, which can save money for insurers and consumers alike.

Second, the MLR rule assumes that insurers are hiking premiums in order to reap excessive profits. This, too, is a fiction. In 2010, the year President Obama signed his eponymous bill into law, the health insurance industry's overall profit margin was 3.3%.Apple's profit margin that year, by comparison, was about 28%.

The insurance industry's low margins then didn't stop the administration from cudgeling insurers with the politically popular MLR rules. By 2015, the industry's profit margin had shrunk to 0.6%.

In the end, patients pay for this misguided rule in the form of higher premiums and fewer choices. After all, insurers who aren't able to meet the 80% threshold solely by trimming administrative costs must either raise premiums or exit the market entirely.

Even the law's defenders don't deny that Americans are paying more for insurance because of the MLR rule. The liberal Urban Institute, for instance, found that the provision caused insurers to raise premiums 2 to 15% in 2014.

That is, if they've stuck around at all. Aetna and UnitedHealth left all but a few exchanges in 2017. Humana will stop selling exchange plans entirely in 2018. Earlier this month [APRIL 6], Aetna announced that it would stop selling exchange coverage in Iowa next year. Anthem, meanwhile, has signaled its intentions to pull out of the exchanges in many of the 14 states where it currently sells marketplace plans.

The provision also inhibits competition by making it nearly impossible for new companies to enter the insurance market. That's because start-up costs, like marketing and the establishment of provider networks, are counted as the sort of overhead that must be limited to 15 or 20% of premium revenues.

And since the rule effectively caps profit margins, investors are reluctant to back new insurers. That further winnows competition -- and protects incumbents.

Not surprisingly, the individual insurance market has seen zero net new carriers since 2008 -- despite the fact that Obamacare mandated that everyone buy insurance and heavily subsidized premiums for millions.

Fortunately -- and perhaps unwittingly -- Democrats gave wide discretion to the executive branch to implement the MLRs.